With approximately 25% of the nation’s installed wind power capacity, Texas is the leading state for wind-generated electricity. There are nearly 12,000 operating turbines with an overall installed capacity of 21,000 MW, and new projects currently under way do not give rise to any serious concerns about the continued growth of this renewable energy sector in Texas, at least in the short term. While the indicators point to the continued development of the Texas wind industry, there are some potential threats on the horizon that should be taken into account.
Current state of affairs
Despite being better known as the oil and gas state, Texas provides ideal conditions for wind energy
projects: Strong winds blow along the southern coast, as well as in the northern and western parts of the state; population density is low outside the urban areas, thus avoiding conflicts with residential concerns; and unlike solar projects using photovoltaic panels, wind energy projects do not interfere with the agricultural use of land, nor do they adversely impact the large Texas cattle farming sector.
These favorable conditions were enhanced by a local governmental framework that encouraged the industry. For example, the Texas legislature recognized early on that renewable energy generated in rural areas needed transmission lines to service the big cities in central and east Texas. As a result, the Electric Reliability Council of Texas oversaw the linkage of a network of transmission lines between areas identified as
Competitive Renewable Energy Zones and urban areas such as Austin and Dallas/Fort Worth. These additional
transmission lines alleviated much of the congestion in transmitting electricity across the state caused by the large number of projects installed in the western part of the state.
Meanwhile, the renewable energy certificate (REC) system, which was first tracked domestically in Texas in 2001, helped to create incentives for investing in wind power projects. Texas’ renewable portfolio standard (RPS) is also credited with the state’s meteoric rise with regard to installed capacity. With consumers becoming increasingly aware of corporate sustainability goals and the need for environmental responsibility, companies welcomed the opportunity to offset their carbon footprint by purchasing or otherwise acquiring RECs. All of these advantageous conditions added up to the wind industry’s impressive progress in the Lone Star State. Installed capacity has more than doubled since 2010 and is expected to increase by nearly an additional 25% in the near future, as projects with a capacity of approximately 5,000 MW are under construction.
Harbingers of change?
Although the Texas wind energy market shows no visible signs of deceleration, the current political environment is not evolving in favor of wind power. The federal administration’s recent announcement of the withdrawal of the U.S. from the Paris Agreement sent shock waves through the renewable energy industry. It remains questionable whether the decision will have any direct effect on investments, but clearly, there will be diminished federal support for the industry for several years. The Texas state government has, up until now, endorsed an approach that does not play fossil fuels and wind power off against each other, but it remains to be seen whether such policy will continue in the future.
What needs to be taken seriously are indicators that the federal administration may consider cutting subsidies. A study requested by Secretary of Energy (and former Texas governor) Rick Perry in mid-June on the negative effects of subsidies at least suggests that the renewal of the production tax credit (PTC) and similar measures are not to be taken for granted. Although technological advances and other operating improvements have made wind power more and more competitive, such developments have led to the argument that cutting subsidies is only helping to advance the competitiveness of the industry, thus allowing lawmakers to vote to cut subsidies without necessarily having to revoke formal support for renewable energy.
Though the public may be more aware of the trends at the federal level, the political environment at the state level is also not free of some troubling trends. The 2015 attempt by the Texas legislature to repeal the state’s RPS has not been forgotten. Although the bill ultimately was not passed into law, the battle over regulatory measures designed to increase the percentage of renewable energy may still be fought. A restrained attitude toward renewables on the federal level might embolden lawmakers on the state level to retry their efforts to eliminate the RPS, although Texas has, for many years, been ahead of the schedule set out in its RPS. While regulations may shape the development of the renewable energy industry elsewhere, the industry in Texas has proven to be more dynamic and a decisive factor as to whether investments in wind power continue to be attractive and could be the fate of the PTC rather than the RPS.
Another recent obstacle for wind power projects arose from a bill enacted by the Texas legislature in the first half of June making wind turbines within a 25-mile radius of certain military bases ineligible for certain property tax abatements. The law cuts back on the reduction of property taxes first introduced by the 2001 Texas Economic Development Act to attract investors to the state.
Due to the large number of U.S. military installations located in Texas, the affected territory adds up to a considerable loss of “tax advantaged” development area. One reason for the legislation, as expressed by lawmakers, is to ensure aviation security, especially to guard against the adverse impact on the reliability of radar systems caused by the rotating blades on the wind turbines. Concerns could also arise from the fact that a wind project located near a military base and owned by foreign investors could become a “front” for espionage, although such concerns were not publicly voiced during the legislative process. It remains unclear whether the bill was passed solely on security considerations or general concerns about the development of wind power.
Furthermore, wind projects located along the state’s southern coastline lie within the path of migratory birds leading from North to Central and South America. Concerns are likely to increase with the development of offshore wind projects in the Gulf. Recently, operating projects have taken measures to protect birds by using radar technology that shuts off turbines as soon as the birds are approaching. For instance, Pattern Energy Group operates a 283 MW radar-equipped, wildlife-friendly onshore wind park along the Texas southern coast.
Even though these obstacles should not be taken lightly, no negative effect on investment activity is readily ascertainable. Several major projects are planned or already under construction. Goldwind Americas, a 100% subsidiary of Chinese wind turbine manufacturer Goldwind, recently invested $250 million in the 160 MW Rattlesnake Wind Project, demonstrating that Texas remains a major investment location for wind energy projects, even for investors from outside the U.S. The U.S. Army started its largest renewable energy project in Texas, consisting of a 50 MW wind farm in north Texas that will, in combination with a solar project, meet approximately half of Fort Hood’s demand for electricity. At the same time, companies located in Texas keep going green: 7-Eleven announced that it will power all of its Texas stores with wind power generated in the state commencing in June 2018. General Motors announced that approximately 50% of its electricity needs for its SUV plant in Arlington, Texas, is derived from wind power, and it aims to increase the share to 100% by the end of 2018. General Mills recently signed a 15-year power purchase agreement for 100 MW of wind power capacity to be produced by a wind project in Concho County, Texas.
These ongoing developments demonstrate that Texas not only is the undisputed leader in wind power, but also is well positioned to keep its lead. While no other state comes close to the installed capacity of wind energy in Texas, the current trends point to the continued growth in installed capacity in the Lone Star State. A lessening of governmental support at both federal and state levels should be closely watched, but it does not appear to be causing a brake on future growth. Texas is one of the most attractive sites for wind power investments not only in the U.S., but also worldwide. Favorable geological, regulatory and economic conditions provide a solid basis for further growth and the continued development of wind power as the energy source of the future.
Clyde (Skip) E. Rankin is partner and Maximillian Wolf is a trainee at law firm Baker McKenzie. They can be contacted at firstname.lastname@example.org and email@example.com, respectively.
VPPAs Fuel Texas Wind Market
One of the most dynamic developments for the continued growth of the wind energy sector in Texas is the advent of virtual power purchase agreements (VPPAs). So-called VPPAs have become attractive for many major corporate entities in the U.S. that are seeking to achieve sustainability goals to meet the demands of constituents and customers.
The so-called contract-for-differences, which is the most popular version of the VPPA, provides a developer in Texas with a stable revenue source based on the “fixed” price per megawatt-hour of electricity produced by the wind project.
Here’s how it works: Although the electricity is not consumed by the corporate off-taker (it is sold into the local market as a merchant project), the corporate off-taker does receive the upside if the electricity is sold at a price above the fixed price but also assumes the “downside” in the event the electricity is sold at a price below the fixed price.
While there are times when the project may be in the red as far as the financial obligations of the corporate off-taker, most contract-for-differences return a positive result over time, and the corporate off-taker receives the RECs and may negotiate for additional environmental attributes generated by the wind projects, all of which may be used to offset the corporate off-taker’s carbon footprint created by its day-to-day operations. One reason Texas has become a popular state for projects utilizing VPPAs is the deregulated electricity market and the liquidity of the market so that these projects are able to deliver electrical power at fair market rates.
The transmission authorities are supportive of these projects, and some of the largest wind projects developed over the past 24 months have come to rely more and more on corporate off-takers paying fixed prices generally more favorable than currently available from utilities. Some recent examples of VPPAs supporting wind projects located in Texas include agreements entered into with General Mills, Philips Electronics, 3M and Owens Corning, to name just a few.